Over the past six months, Avery Dennison’s stock price fell to $188.25. Shareholders have lost 15.5% of their capital, which is disappointing considering the S&P 500 has climbed by 6.6%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Avery Dennison, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even though the stock has become cheaper, we're cautious about Avery Dennison. Here are three reasons why there are better opportunities than AVY and a stock we'd rather own.
Why Do We Think Avery Dennison Will Underperform?
Founded as Kum Kleen Products, Avery Dennison (NYSE:AVY) is a manufacturer of adhesive materials, display graphics, and packaging products, serving various industries.
1. Core Business Falling Behind as Demand Declines
We can better understand Industrial Packaging companies by analyzing their organic revenue. This metric gives visibility into Avery Dennison’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Avery Dennison’s organic revenue averaged 2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Avery Dennison might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Avery Dennison’s EPS grew at an unimpressive 7.5% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 4.2% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Avery Dennison’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Avery Dennison, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 18.5× forward price-to-earnings (or $188.25 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
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